Indicators are auxiliary tools for conducting a technical analysis of the market. One of the easiest to use is the RSI indicator, which is often used by newcomers to Forex. Welles Wilder introduced this tool to the general public over 40 years ago.
The abbreviation means “relative strength index”, but experts say that this is not the most appropriate name for the indicator. The thing is that it shows not the relative strength between compared instruments, but the inner strength of a particular tool. In other words, the indicator displays the speed and amplitude that characterize price action. By correctly interpreting signals, a trader can predict the strength of a trend and the probability of its reversal.
Today the Relative Strength Index is part of almost any software for technical analysis of the market.
RSI is available by default in MT4 and MT5 trading terminals.
The main variable for the calculation is the timeframe. When talking about RSI, Welles Wilder argued that it was best to use a two-week period. However, traders rarely stick to classical decisions nowadays, so the analysis can be performed with any set period.
The shorter the selected period the more sensitive the tool. If you do not have much experience with RSI, it is better to opt for long periods.
The indicator line on the chart ranges from 0 to 100. It demonstrates how the price has changed after a certain number of candles (depending on the set period).
When trading with RSI, you should not focus only on the 100 value. The following values are also important:
The above should not be considered the ultimate truth. You need to correctly interpret RSI signals and pay attention to the readings of other technical analysis tools.
To be able to make the best possible decision, experienced traders recommend testing RSI on different timeframes. For example, the indicator may indicate that an asset is oversold on a ten-minute chart, while it may be overbought on a three-hour chart. In this case, you should favor the data of the larger timeframe as the most objective.
Strictly follow your trading strategy. If the indicator suggests entering a trade, do not hesitate! Only strict adherence to your own rules will reduce losses and increase profits.
The most important thing is to always remember that there are no Forex indicators that are never wrong. That is why it is so important to use simultaneously not one tool, but several, comparing their signals and eliminating unnecessary noise.
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